Exam 13: Financial Crises: Causes and Consequences

Samantha and Jamaal both invest in a stock whose price goes from $40 to $50 after one year and $60 the next. Samantha borrowed 25% of the money to invest while Jamaal borrowed none. Find their effective rates of return on the initial price, ignoring the cost of borrowing.

Changes in stock prices are the result of changes in fundamentals.

Which government action does NOT necessarily involve putting taxpayer money at risk?

High interest rates increase lenders desire to lend.

When companies cannot plan for the future and when investors feel they cannot estimate future corporate earnings or interest, inflation, or default rates, they tend to hold cash instead of investing in a new factory or equipment.

The way the government dealt with which of these institutions may have mitigated the asymmetric information problem between regulators and financial firms?

To help minimize the financial crisis of 2007-2009, the government

High interest rates can be both the cause of a bubble and the result of a burst.

Higher leverage can protect investors against large losses when asset prices fall.

Higher leverage can give investors higher returns during a bubble.

An investor borrows half the funds to invest in an asset whose price falls from $200 to $150. Ignoring the cost of borrowing, what is the effective rate of return?

IBs:

Bubbles always end due to mistaken government intervention.

The Federal Reserve was forced to take over AIG to alleviate the panic in 2008.

Leverage increases both risk and return for investors.

An investor borrows half the funds to invest in an asset whose price rises from $100 to $120. Ignoring the cost of borrowing, what is the effective rate of return?

How do short term interest rates act during a financial panic? Why?

What are the costs and benefits in the way the government dealt with Lehman Brothers during the financial crisis in 2008?

A stock market bubble can start due to

"Under water" means an investor has negative equity.